When Congress passed the Medicare reform bill in late 2003, 
they created a new way for small businesses and individuals 
to obtain affordable health insurance through health savings 
accounts (HSAs).  Also referred to as HealthCare IRAs, HSAs 
combine a high-deductible health insurance policy with a 
tax-exempt savings account. They are available to individuals 
younger than 65.

From an investment standpoint HSAs are a winner. HSAs can be 
triple-tax free and, as such, they are a better deal than 
almost any other form of savings account. 1) HSA deposits are 
tax-free, 2) HSA investment earnings grow tax-free, and 3) HSA 
withdrawals are tax-free when used to pay qualified medical 
expenses.

Unlike the old "use it or lose it" rules for the medical 
savings accounts, any unused amounts in an HSA can stay in 
your account and accumulate as a nest egg for later years.  
Those with balances in medical savings accounts should roll 
them over to an HSA before year-end.

There are some very compelling reasons for self-employed 
individuals and independent contractors to consider HSAs: 

1. Affordability. According to the National Small Business 
   Association, high-deductible insurance policies offered with 
   HSAs could be up to 40 percent cheaper than they would be 
   without an HSA.

2. Tax-free. HSAs are tax-free. Individuals who have HSAs can 
   decide what medical expenses their money will cover without 
   worrying about taxation on their account. 

3. Portability. HSAs are portable. So, if an independent 
   contractor working for a particular company chooses to 
   leave, instead of having to establish a health reimbursement 
   arrangement at every new company, that contractor can take 
   their HSA with them, completely intact. 

4. Availability. Unlike their predecessors, the medical 
   savings accounts, HSAs are available to almost anyone under 
   a high-deductible insurance plan. The annual deductible for 
   the insurance plan must be at least $1,000 for an individual 
   and $2,000 for a family. 

HSA deposits are subject to a cap of $2,600 for individuals and 
$5,150 for families; however, anyone over 55 with an HSA may 
make additional contributions of $500 to their account. To 
discourage individuals using HSAs for non-medical expenses, 
distributions are subject to income tax and a 10% penalty. The 
penalty is waived for non-medical distributions made after 
individuals reach age 65, or in the case of death or disability.

HSAs became effective January 1, 2004, and only a handful of 
companies so far are offering HSAs. We expect that several 
large insurance and mutual fund companies will enter the HSA 
market in the coming months.